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Timing the Market

Timing the Market

January 10, 2023

Market timing is not impossible to do. Short-term trading strategies have been successful for hedge funds, portfolio managers and full-time investors who use chart analysis, economic forecasts, and sometimes even gut feelings to decide the optimal times to buy and sell securities. However, few investors have been able to predict market shifts with such consistency that they gain any significant advantage over the long-term, buy-and-hold investor.

For the average investor who does not have the time or desire to watch the market daily – or in some cases hourly – there are good reasons to avoid market timing and focus on investing for the long run. Market timers would argue that long-term investors miss out on gains by riding out volatility rather than locking in returns by exiting the market. However, because it is extremely difficult to gauge the future direction of the stock market, investors who try to time entrances and exits often tend to underperform investors who remain invested.

The graphic below shows the difference in performance if an investor simply missed out on some of the best days in the market by sitting in cash. The results are staggering. The returns are actually negative if you missed the 30 best days by trying to time the market.

We know it can be difficult to “stay the course” when the market is down. But when investing in stock, it is crucial to keep a long-term perspective. The chart below illustrates how stock market returns can vary greatly in the short term but become more predictable over longer time periods.

Since 1971, the returns of the S&P 500 over a one-year period have varied from positive 53.7% all the way down to negative 44.8%. But as the timeframe lengthens, the returns become more predictable AND more positive. Since 1971, there was no negative 15-year period in the stock market. The returns varied from positive 15.7% to positive 1.8%. That is why the bucket plan is so crucial. Money one plans on using in the short-term should not be invested in stock. It is too hard to predict what the stock market will do in the short term. Ideally, one should have a 10 year or more time horizon when investing in stock. Having a longer timeframe greatly increases your chances of success.

Hopefully this has given you some perspective on timing the markets. For the average investor, the best approach is usually a long-term, buy-and-hold strategy. We encourage you to work with your financial planner to determine a mix of stock and bonds that you are comfortable with, and will stay invested in, through good times and bad.